TAX AND PUBLIC INPUT COMPETITION 1 Tax and public input competition Agnès Bénassy-Quéré, Nicolas Gobalraja and Alain Trannoy CEPII, Paris, and Université Paris X; Université Paris X; Ecole des Hautes Etudes en Sciences Sociales, IDEP-GREQAM. 1. INTRODUCTION There is much concern about fiscal competition in the public debate in Europe. The idea that European countries are forced to reduce their corporate tax rate to attract foreign investment (small countries) or to limit the capital drain (large countries) is widespread. And yet, businessmen do not report corporate tax rates as a leading factor in their decision to invest in a country. This disconnection between the public debate and the concern of firms is puzzling and is likely rooted in too partial empirical evidence. Let us first elaborate this point. On the one hand, focusing the discussion on the corporate tax rate is understandable in view of Graph 1. The stylised facts of tax competition in the EU are well documented by Devereux et al. (2002), Kogstrup (2004), or Devereux and Sorensen (2005), among others. Here we concentrate on the recent acceleration of the “race to the bottom” and on the impact of EU enlargement. As shown in Graph 2, EU15 statutory rates declined by 9 percentage points on average between 1996 and 2005. Meanwhile, the statutory rates of new member states (NMS, hereafter) declined by 11 percentage points. Hence the tax We are grateful to Michel Le Breton, Brigitte Dormont, Cecilia Garcia Penelosa, Thierry Mayer, Fred Rychen Tanguy Van Ypersele, two referees and an editor for useful suggestions, and to Michael Overesch for providing a complete EATR data set. The usual disclaimer applies.